IBV - Eliminating the strategic blind...

IBM Business Consulting Services

ibm.com/bcs

An IBM Institute for Business Value executive brief

Technology-driven business strategy spurs innovation and growthEliminating the strategic blind spot

IBM Business Consulting Services, through the IBM Institute for Business Value, develops

fact-based strategic insights for senior business executives around critical industry-specific

and cross-industry issues. This executive brief is based on an in-depth study by the Institute’s

research team. It is part of an ongoing commitment by IBM Business Consulting Services to

provide analysis and viewpoints that help companies realize business value. You may contact

the authors or send an e-mail to [email protected] for more information.

Eliminating the strategic blind spot IBM Business Consulting Services1

IntroductionWith growth rapidly moving past cost-cutting as the top corporate objective, executives are actively rethinking their business strategies, searching for innovative ways to spur sustainable growth. Despite all the consternation around finding the ideal strategy, perhaps the answer lies not in the strategy itself, but rather in how it is developed.

Guided by classic approaches, companies today generate volumes of data to analyze customer segments, relative market share, and current and potential competitive threats as they formulate their business strategies. They research ways current products and services can be enhanced and modified to deliver incremental value to current customers. But are these classic inputs – sometimes distilled into the “five forces” – enough? Do they sufficiently address the context in which companies must today formulate business strategy?

For more than a century, business leaders have viewed technology as a means to execute their business strategies. Strategy came first, and technology was simply a means to implement it. Unfortunately, given today’s technology context, this mindset leaves a large and expanding blind spot when it comes to strategy development.

Some executives confine their view of “technology” to information technology (IT). They tend to segregate firms into two categories – those that deal primarily with information and those that work with physical goods and services. For the “bit handlers” – the Ciscos, Motorolas and IBMs of the world – most would agree that technology should be a factor in setting corporate strategy. But for the “atom” companies, many still view technology as an efficiency play or an after-the-fact enabler – a way to implement or optimize an already defined business strategy, not as a mechanism to determine what opportunities exist and what is strategically possible.

But technology is much more than IT. Technology in its broadest sense is defined as the means with which firms transform labor, land and capital into goods and services.1 With this perspective, technological advances are everywhere. Even more importantly, companies are facing a proliferating set of technologies that stand to directly impact or potentially disrupt their markets. Many of these technologies cross into the world of atoms in the form of digital technologies. Further, changes in the technology context are coming much faster. Lag periods – the time between changes in technology context – are continually shrinking. Across virtually every industry, technology adoption curves are getting steeper (see Figure 1).

Contents

1 Introduction

2 Innovation – Path to growth

4 Invention is not innovation

5 Technology-driven rollercoaster

9 What makes innovators innovative?

12 The common threads

14 Bye, bye blind spot – Technology-driven business strategy

16 Where is your strategy development approach taking you?

17 Conclusion

18 About the authors

18 About IBM Business Consulting Services

19 References


Figure 1. Adoption rates for new technology-based consumer products within the U.S.

To innovate and grow in this type of world, where rapid-fire technological advances constantly upset the status quo, leaders must acknowledge that technology itself shapes, alters and increasingly defines the very nature of the businesses in which they compete. Technology can no longer be left as an implementation issue – it must be at the heart of strategy formulation.

Some successful companies have already caught on – their innovations sit at the intersection of market insight and technological know-how. As part of a recent study, the IBM Institute for Business Value examined ten of these companies to identify what they all have in common. Its research suggests that successful companies are eliminating traditional strategic blinds spots that have plagued industry peers by taking a fundamentally different approach to strategy development – one that IBM calls technology-driven business strategy.

Innovation – Path to growth Worldwide, CEOs are turning their attention to growth. Out of the 456 CEOs interviewed as part of the 2004 IBM Global CEO Study, a full 80 percent cited revenue growth as their top focus area for strengthening financial performance over the next three years.2

100

90

80

70

60

50

40

30

20

10

0

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010(E)

Perc

ent c

onsu

mer

ado

ptio

n

Sources: Federal Reserve Bank of Dallas. “Time well spent: The declining real cost of living in America.” 1997 Annual Report; “Benchmark 2004 Data Overview.” Forrester Research, Inc., June 2004; IBM Business Consulting Services analysis.

Telephone

Automobile

Range

Color TV

Microwave

DVD Player

PC

Cell phone

Digital camera

DVRHome network


That intense focus is not surprising, given that today’s stock prices often reflect a significant growth expectation. Executives must drive material growth simply to maintain market value (see Figure 2); to raise shareholder returns, leaders must somehow find even more sources of growth.

Figure 2. Expected growth rates based on current stock valuation.

This growth expectation is not readily met through classic management levers such as targeting current customers with enhancements, derivatives or extensions; increasing prices (even when competitively feasible); and capturing relative share of market growth within current markets. Acquisition might satisfy such growth expectations, but at what cost premium? And at what realization risk? Yet, there is one additional source of growth. We define this source as innovation-based growth.

Innovation-based growth has the potential to provide companies with the sustainable growth they seek. By definition, innovation-based growth is not incremental in nature, but seeks to deliver fundamental new value to current customers and markets or create entirely new market opportunities. Such strategies are difficult for competitors to replicate, providing a more sustainable source of growth than the routine extensions of current products and services can offer.

80

60

40

20

00

Pric

e/ea

rnin

gs ra

tio

2 4 6 8 10

Source: IBM Business Consulting Services analysis.

15 20 25

Expected growth rate (percent)

5% risk free rate6% risk free rate7% risk free rate

Valuation variables• Beta = 1• Risk premium = 5.5%Growth stage• 10 years• Payout = 20%• Growth = X%Remaining years• Payout = 50%• Growth = 8%


Generally, innovation can be classified into three categories:

• Product or service – the traditional area associated with innovation whereby new products or services that deliver increased value to customers are brought to market

• Operational capability – innovation that emerges in the way companies acquire and organize resources, and ultimately deliver value to their customers

• Business model – innovation that is grounded in a new integrated value proposition, operating processes and profit mechanism that deviate significantly from an industry’s current business model.

Invention is not innovationIn hopes of driving innovation-based growth, companies often invest heavily in R&D. Overall, the U.S. spends 2.7 percent of its gross domestic product on R&D. From 1994 to 2000, total R&D expenditures jumped from US$169.2 billion to US$265 billion, the largest increase for any six-year period in the nation’s history.3 With so much invested, one would expect a corresponding increase in market value.

Because they are tangible and easy to measure, patents can be construed as an indicator of successful innovation. Unfortunately, by this measure, invention does not guarantee revenue growth or shareholder value creation (see Figure 3). In fact, among the 10 organizations that were granted the most U.S. patents between 1993 and 2003, 4 out of the 5 publicly traded companies returned less to their share-holders than the S&P 500 over that same time period.4, 5

Figure 3. Across the S&P Global 1200, the number of patents awarded has no correlation with shareholder returns.

60

40

20

0

-20

-40

-60

500 1000 1500 2000 2500 3000 3500

Patents awarded by the U.S. Patent Office in 2002Aver

age

annu

al T

SR(o

ver 1

0 ye

ars)

Number of patents vs. total shareholder return (TSR)(Global 1200 companies)

Note: n = 1111.Source: IBM Business Consulting Services analysis; U.S. Patent Office; Compustat.

R2 = 0.0006


Although invention is part of the mix, innovation is clearly something bigger. IBM – based on its experience working with clients in various industries around the world – thinks of innovation differently. IBM believes that innovation emerges where market insight and technological know-how intersect, when businesses match what the market needs with what technology makes possible.

This definition of innovation has several important implications. First, technology matters when it comes to driving growth and, thus, to the formulation of business strategies. Second, when factoring in technology, know-how, as opposed to invention, is sufficient. In fact, many innovation-based strategies are based on the unique market application of an existing integrated set of technologies rather than a new technological “invention.” Third, innovation occurs at the intersection. In an entre-preneurial venture, this intersection is inherent and often manifests itself initially in a single person – the visionary entrepreneur. In established companies, the intersection is not inherent. Although it may have both components, a company’s processes, planning approach and organizational norms can prevent the natural blending of market insight and technological know-how. Finally, given today’s rapidly changing technological context, know-how can be fleeting, requiring companies to maintain pace with this changing context or risk being exploited by it.

Technology-driven roller coasterAlthough technology has always had an impact on markets and competition, its influence has increased significantly over the prior two decades – driven by two trends described earlier: the proliferation of current and potential technologies that could impact a company, and the pace of change in the technology context for a given market or industry.

Historically, companies needed to manage only a limited number of technologies, and the associated technological know-how may have provided a source of competitive advantage. Now, many companies are faced with an expanded and potentially splintered set of technologies. The “legacy” technologies may become pedestrian in nature and no longer offer a competitive advantage. The new technologies may represent a source of competitive advantage within the current competitive context, or, as documented in recent literature, may even disrupt a market.7, 8 Companies cannot easily cover all potential outcomes, since capital and resource constraints typically do not allow a company to directly invest in every technology. Thus, leaders must make critical, strategic decisions on where to invest, partner or procure. For example, pervasive and wireless technologies have entered, either implicitly or explicitly, many firms’ technology portfolios – in industries ranging from medical equipment to media content distribution to insurance underwriting.

“I needed employees to start

thinking about their jobs as

innovating, not just researching

and developing. R&D means

improvements to existing

products, quality assurance,

line extensions. Innovation is

something truly different in

the market that makes your

customers’ lives better.”

– Herb Baum,

Retired CEO of Dial 6


Technology can create radical change in routine products

Technology is providing the wherewithal to fundamentally alter the performance of everyday products

like household appliances and vending machines. Italian electronics manufacturer Merloni has

announced a line of innovative white goods that use RFID technology to change the capabilities of

ordinary products. When loaded with RFID-tagged clothes, for instance, its washing machine can select

the appropriate wash program and even warn consumers when incompatible fabrics are found in the

same load. The refrigerator can propose nutritious meals and recipe instructions based on its RFID-

tagged contents and notify consumers before foods expire.9

The function of vending machines is changing too – from what is dispensed to how efficiently the

machines run to how consumers pay for merchandise. Known for their affinity for the convenience

of vending machines, Japanese consumers are now using vending machines to download music and

software games.10 Businesses anxious to reduce the energy bills associated with their vending machines are using devices equipped with motion sensors that can turn the machines off when no one is around.11 In many regions, payment is now possible with a swipe of a card or through a mobile phone – not just with cash.

Laundry rooms at apartment complexes and college dormitories are combining technology advances

in both domains to change the typical laundry day. Users can check the status of washers and dryers

remotely through a computer or mobile device and select appliance functions such as soap and fabric

softener dispensing. When the load is done, they are notified by e-mail to their choice of device.12

Each one of these applications stands at different points in market realization. What is important,

however, is that to conceive of these opportunities, technology must be an input to the strategy

formulation. In the absence of this input, missed market opportunities may arise or strategic blind spots

can emerge. In addition, key strategic questions must be answered:

• What are the technologies that must be in the strategic technology portfolio?

• How is the portfolio changing? And what are the implications to the core capabilities and competitive

advantage of the business?

• How do the current strategic planning processes ensure that market insight intersects with this

technological know-how to avoid technology-push and ensure timely introduction of the innovation?

• How will the discrete technologies and associated capabilities be accessed and integrated? Will this be

achieved via internal development, partnership or sourced?


Few companies are immune to this proliferation. Even product categories traditionally considered as low tech as toothpaste and mouthwash have seen rapid market expansion associated with new product categories (teeth-whitening products and breath strips) grounded in the application of technologies to create new markets.

This is not a transitory trend; one only needs to look at the automotive industry to see the steady progression that is remaking a historically mechanical product into a decidedly electronic one. By 2010, 90 percent of automotive innovation is expected to be electronics related (see Figure 4).

Figure 4. Automotive innovation is becoming predominantly electronics-related.

Not only is technological change pushing into new frontiers, its pace is also accel-erating. More specifically, there are more frequent changes in the technology context, whereby the period of relative stability between technological shifts is decreasing. In a period where there are long lags between changes in technology contexts, a company can assume away or treat technology as a constant. Business strategies would implicitly, and safely, assume the current technology context. However, for many companies, this reality is eroding. Making the assumption of a static technology context could prove strategically risky since, for most companies, the time period between context shifts is shrinking. Therefore, technology must be viewed as a critical business strategy input, and the frequency at which that input is evaluated must be increased.

100

90

80

70

60

50

40

30

20

10

0

Perc

ent o

f inn

ovat

ion

1970 2000 2010

Sources: “Reuse of Software in Distributed Embedded Automotive Systems.” Audi. 2004; Embedded Automotive Electronics Symposium, Peugeot, June 23, 2004; “Roland Berger Study Says Cost Pressure on Automotive R&D Will Increase.” PRNewswire. July 21, 2004; IBM Institute for Business Value interviews and analysis.


These compounding trends are visually represented in Figure 5. Companies must make capital and resource allocation decisions on an increasing set of technologies relevant to today’s context – typically referred to as sustaining technologies. This is a necessity to compete and win in today’s market. A missed innovation cycle, for instance, could cause a loss in market share, competitive strength or pricing power. These activities are table-stakes to drive growth. To sustain growth, successful companies must also anticipate the shifting technology context – shifts which increasingly come much faster on the heels of their predecessors. These emerging – potentially disruptive – technologies, when invested in, appropriately nurtured and ultimately exploited by incumbents, allow companies to sustain growth over time. They often are the source of new markets and customers. Without managing both technology portfolios, firms risk failing to compete in the current context or failing to maintain their growth within a context shift.

Figure 5. Managing changes in technology context.

With this need to manage dual portfolios and a shrinking time period between waves of change, companies can no longer afford to treat technology as a second-tier management issue. Ignoring the technology variable or assuming it away as a static variable in business strategy formulation can put business growth at risk – with lost revenue or forfeited market share when innovation cycles are missed or even industry irrelevance when business models suddenly become obsolete.

A = x years

Technology “A” Technology “B”

D = x - y years

Technology “A” context becomes obsolete as the next generation of emerging or disruptive technology, “B”, is introduced and accepted in the marketplace as the de facto standard. At this point, companies must be prepared to transition to the next generation of technology to sustain profi table growth.

Profi table volume

Tech

nolo

gy p

enet

ratio

n

Time

Current technology wave

Companies must invest in the current wave of sustaining technology...

... at the same time, companies must identify and invest in the next wave of emerging potentially disruptive technologies.



What makes innovators innovative?To learn more about how successful businesses innovate and incorporate the technology variable into business strategy development, the IBM Institute for Business Value studied 10 companies that are known within their respective industries for strong innovation. These companies’ innovations stood out because they accomplished one or more of the following:

• Changed the basis of competition. At a particular point in time, within any given industry, businesses typically compete on a specific subset of performance dimensions such as product features, price, customer service or breadth of offerings. Companies most often invest energy in beating the competition along these “accepted” performance dimensions. Innovative companies, on the other hand, shift the game. Instead of competing head-to-head with industry rivals on historical performance measures, they differentiate themselves through a new dimension that exploits an emerging or unarticulated market need. For instance, an industrial products company might shift the basis of competition from product features to rapid fulfillment, or a services company could change the focus from price to convenience. This type of innovation delivers new value to consumers, while creating competitive differentiation for the innovative company.13

• Broke the rules of scale. Within each industry, a certain set of implicit rules often exist around scale. For example, a new model of car must sell x units over the product’s life to be profitable, or a new book must sell x copies in its first printing to break even. Behind these heuristics are certain assumptions about scale that guide capital investment decisions, allocation of resources and market selection and entry strategies. Most companies seek to optimize operations within these boundaries. Innovative companies, however, also look for ways to break these rules – often leveraging technology to deliver profit at a lower scale point or, conversely, achieve scale advantage where previously none existed. eBay is a prime example: it managed to create scale advantage in a market that was long considered regional and hyper-fragmented.

• Introduced totally new business models. In each industry, a dominant business model usually prevails. Using the standard business model (the operating model employed to deliver on its value proposition and generate profits), traditional competitors seek to drive greater efficiencies and increase revenues. Meanwhile, innovative companies are constantly seeking out alternative business models that have the ability to disrupt or undermine the incumbent industry business model. Here again, technology can play a pivotal role, allowing a business model to emerge that does not rely on the historical operating model or profit mechanisms, often shifting large amounts of market value to the innovative competitor. With its direct-to-consumer, build-to-order model, Dell turned its industry’s traditional build-to-stock model on end – allowing the company to avoid high-cost channels and excess inventory that often plagued rivals.


The accomplishments of the companies studied also reinforce the IBM view of innovation; in every case, these companies combined market insight with techno-logical know-how to break stride with their competitors (see Figure 6). Looking across the broad cross-section of businesses and industries analyzed, there were no revolutionary inventions that precipitated their innovations. Most of the technologies involved were not proprietary – and most had been available for quite some time. However, these companies’ familiarity and knowledge of technology provided a new lens through which they could explore solutions to market needs and opportunities. And that timely combination led to innovation.

Figure 6. Where innovation happens.

AirbusDesigner and manufacturer of aircrafts

Apollo GroupProvider of higher education programs

Brother IndustriesMaker of information and document

equipment, home and industrial sewing machines and production machine tools

CaterpillarManufacturer of construction and mining

equipment, natural gas and diesel engines, and industrial gas turbines

CemexSupplier of cement, ready-mix

concrete and aggregates

Charles SchwabProvider of securities brokerage and

related fi nancial services

DellSeller of computer products and services

for consumer and professional use

Frito-LayMaker of chips and snack foods

HertzSupplier of vehicle and equipment rentals

Progressive InsuranceProvider of automobile insurance and

related services

Market insight Innovation Technological know-how


Customers care about total cost to own and operate not just purchase price

Increasing number of adults wanted to further their education but didn’t have the time

Customers care about getting a job done, not about the specifi c technology

Customers care about total cost to own and operate not just purchase price

Customers have expensive capital waiting idle while they are waiting for cement deliveries

Many investors wanted cheap transactions not expensive advice

Customers wanted price, quality, fl exibility and convenience

Consumer demand and preferences vary from region to region, requiring local sales and marketing fl exibility

Travelers are willing to pay premium prices for convenience

Good drivers want and expect cheaper rates

Fly-by-wire technology reduces fuel consumption and enables effi ciencies through common cockpit design

Introduced online learning and became the University with the most enrollees in the country

Successfully transitioned from sewing machines, to typewriters, to fax machine, to printers, and now software

Introduced fl eet mgmt. tools that monitor equipment performance and automate earth-moving tasks

Changed the nature of competition by reducing the delivery window from 3 hours to 20 minutes

Introduced the fi rst discount brokerage after industry deregulation then disrupted old business with online business unit

Sells customized computers with standard parts at low prices

Enables salesforce to manage price, inventory, and customer changes in realtime in the fi eld

NeverLost on-board navigation system and #1 Club Gold expedited pick-ups and returns

Able to aggressively price policies for good drivers while increasing underwriting profi t

Fly-by-wire technology

Distance learning technologies

Continuously evolving and expanding capabilities

Electronics, GPS, engineering software

Satellite tracking technology and advanced scheduling software

Databases, call center, voice recognition technology, online trading

Supply chain integration, call centers, e-commerce

Hand-held devices, wireless communications, software

Hand-held devices, navigation systems

Satellite tracking technology and advanced risk calculating methodologies


Technology helps Progressive pioneer

With more than 12 million customers, Progressive is the third largest auto insurer in the U.S.14 During

the last decade, Progressive has certainly lived up to its name, launching a series of firsts in its industry:

• 1994 - Launched the industry’s first toll-free, 24-hour auto insurance comparison rating service

• 1996 - Followed with the first online auto insurance comparisons

• 1997 - Gave consumers their first opportunity to buy an auto insurance policy online in realtime

• 2000 - Became the first auto insurance company where customers could locate an agent using Web-

enabled phones

• 2000 - Accepted the auto insurance industry’s first wireless payments.15

Over the years, Progressive has become adept at blending market insights with technological know-how

to produce innovations that differentiate it from its peers. For example, Progressive knew that, after an

accident, waiting only produced apprehension and frustration in its customers. Because of its working

knowledge of satellite communications, the company recognized that claims agents did not have to

be seated at their desks to serve customers. Taken together, this knowledge prompted Progressive to

introduce 2,600 Immediate Response Vehicles in 1994, revolutionizing the way insurance companies

handled claims. The lynchpin of the program was a fleet of specially equipped automobiles linked to

global positioning satellites and outfitted with laptops, printers, mobile phones and, more recently,

Internet connections. Using these Immediate Response Vehicles, trained adjusters could travel quickly to

wherever customers were and provide on-the-spot estimates and settlement checks.16

Since the industry’s inception, auto insurance companies have strived to better understand risks so that

they could appropriately price their products. For years, that calculation rested largely on demographic

norms and (after insured) an individual’s accident history. As Progressive’s knowledge of GPS and

cellular technologies grew, the company realized that it could get a much more accurate view of risk

depending on how an automobile is actually used. Based on its understanding of the market, Progressive

believed that consumers would be willing to share private information (when and where they drove)

in exchange for lower premiums. To quickly understand the value of the opportunity, Progressive’s

approach was to create learning opportunities and evaluate the technical feasibility by introducing a

usage-based pilot driven by this blend of market insight and technological know-how. The Houston,

Texas-based pilot effort was the first auto insurance program to give consumers direct control over how

much they pay. The pilot program collected information on mileage and driving patterns and combined

that with risk data to more precisely price premiums for its insured population.17

A steady stream of innovation has contributed to superior financial results at Progressive. In 2003 alone,

the company’s net income increased 88 percent.18 Since 2001, Progressive’s stock has consistently

outperformed both the Dow Jones Property and Casualty Insurance Index and the S&P 500.19


The common threads What do these innovators have in common? Based on our research and experience working with clients, we have identified some common themes in how innovative companies approach business strategy development. We observed six strategic tenets that help companies create a business environment that is more conducive to innovation and promotes technology-driven business strategies:

• Consider technology a core input. Instead of viewing technology only as enabler of their business strategies, businesses should consider it a primary input to strategy formulation – on par with other necessary variables such as customers, markets and competitors. At Boston Coach, business strategies have to balance various (sometimes competing) objectives: customer satisfaction, operational efficiency and revenue growth. As dispatching, its core business process, became increasingly complex, it seemed unlikely that the company could simultaneously address their business objectives with a single strategy – until they decided to factor technology into their business strategy development process. The company hired a research team to identify applicable technological innovations and assess potential business implications. Based on its findings, the firm decided to create a proprietary scheduling algorithm and optimization engine capable of refining complex dispatch schedules in realtime. These innovations have become the foundation for a new operating model which has the capacity to support up to a 10 percent increase in sales without additional vehicles, drivers or dispatchers, while simultaneously increasing productivity by 10 to 20 percent.20 By factoring technological possibilities into its core business strategy, Boston Coach was able to break the rules of scale that had been implicitly governing its approaches up to that point. With its innovation, the company redefined the “norms” for revenue capacity per vehicle and the cost of a near-perfect on-time pickup rate – and set a new competitive benchmark.

• Revisit strategy and technology context regularly. For many industries, the technology context has the potential to change more rapidly than the historical three- to five-year strategic planning cycle. Thus, companies need to continuously manage and revise strategy to proactively take advantage of the evolving techno-logical environment rather than reacting to technology-induced changes to their markets and businesses. Hertz, for instance, has continually leveraged wireless and satellite technologies to create new operational capabilities and customer solutions that deliver value to the customer and differentiate it in a market susceptible to commoditization.


• Uniquely manage emerging businesses opportunities. Companies need separate organizational procedures, structures and policies to manage emerging business opportunities differently than their core businesses, allowing market insight and technological know-how to intersect and innovations to take root. When Norwich Union embarked on its ground-breaking innovation for usage-based auto insurance policies, it shielded the emerging opportunity by setting apart a separate team dedicated to this particular project. This small team could experiment, refine their approach and make decisions much faster.21

• Plan for disruptions. By understanding the power of technology to change long-held business assumptions, companies can better anticipate market changes and actively plan out how to disrupt businesses, sometimes even their own. Both Norwich Union and Progressive have incorporated new technologies that make a usage-based insurance model real, creating the opportunity to unseat the historical underwriting, pricing, product and customer service models.

• Manage for today’s and tomorrow’s context. Knowing the rapid rate of techno-logical change, businesses should manage a diversified portfolio of capabilities – comprised of both sustaining technologies (used to keep pace with the innovation cycles in their existing businesses) and emerging technologies (technologies that can create new markets or potentially disrupt current markets). Clearly, Charles Schwab has remained at the forefront of the technological advances that are pertinent to its existing business, winning recognitions such as Gomez’s number one Internet Broker, Forbes Favorite brokerage Web site and one of CIO Magazine’s top 100 companies. But, at the same time, the company continues to anticipate shifts and invest in emerging technologies such as grid computing. The company began to look at this emerging technology back in 2001 as a potential means to provide the computing power needed for intense advice computations like what-if simulations and Monte Carlo routines. Schwab was anxious to tap its own unused cycles and use that latent computing power to significantly enhance and scale its advice capabilities. In 2002, it ran a Grid pilot centered on providing custom portfolio recommendations for each customer. The results were impressive. By breaking down the application into manageable pieces that could be distributed to multiple processors and then reaggregated after computation, the grid-enabled system reduced processing time from an average of 8 to 10 minutes to just 15 seconds. With this newfound capability, Schwab could now dramatically change its relationship with customers. Instead of sending an investor home to wait for recommendations by e-mail, fax or mail, an advisor can provide recommendations in near-realtime while sitting and discussing options with the customer, thereby creating new market opportunity potential.22


• Focus technology on the customers’ priorities. Rather than focusing exclusively on technology-enabled internal efficiencies, companies must also concentrate on problems their customers are trying to solve and identify technologies and new business models that can impact those particular issues. As part of its ongoing evaluation of products and markets, Siemens Medical Solutions makes a concerted effort to consider the entire business process, not just how a particular medical device is used. This holistic perspective has led the medical device manufacturer to focus on integration capabilities among devices as well as higher-value managed service offerings. For example, the company not only considers how to improve its medical imaging product, but also how to make imaging information available to clinicians when and where needed, even in the operating room. The Siemens’ syngo platform provides speech recognition features and online, realtime discussion capabilities to support surgeons’ needs, and automates routine workflow activities such as automatically notifying the intensive care unit about the patient’s impending arrival.23

Bye, bye blind spot – Technology-driven business strategyCollectively, these fundamental principles turn the typical strategy development approach on end (see Figure 7). Instead of being an implementation issue or a static assumption, technology becomes a catalyst at the very initial stages of strategic planning, merging with market insights to produce truly innovative ideas.

IBM calls this approach technology-driven business strategy.

Figure 7. Technology-driven business strategy replaces the sequential nature of traditional strategy development with a parallel approach.

Traditional approach to strategy development

Launch and operateBuildDesignPrototypePlanStrategy

Technology-driven business strategy approach

Strategy

Plan

Prototype

Design

Build

Launch and operate

Start

Start Finish

Finish



Because technology competencies are engaged at the outset, planning and prototyping can occur earlier. Companies can engage in “strategy prototyping,” testing a variety of potential strategies before a particular course is set.24 With this iterative, learning-based approach, prototyping takes on a higher purpose – exploring a spectrum of strategic possibilities, not just validating a selected strategy’s feasibility. Strategic planning is not anchored to a calendar, but is evaluated and revised to take advantage of insights gleaned from new learning and changes in the technology context.

At its core, the technology-driven business strategy approach is fundamentally different than traditional strategy development (see Figure 8). In most strategic planning efforts, the emphasis is on analyzing what is known about the competition, suppliers and targeted buyers. But, under a technology-driven approach, the focus shifts to include exploration of new, uncharted areas – products and services that have no precedents, emerging market segments that no one else sees, new operational capabilities that change the nature of competition – actions that all support innovation.

Figure 8. Technology-driven business strategy development is quite different.

Approach:• Analyze the known• Avoid areas of uncertainty• Procedural• Focus on market, customer, channels,

products• Historical context

Goal of each phase:• Complete all activities and analyses before

moving to next stage• Meet hurdle or review criteria prior

to moving to next stage or remain in current stage

Characteristics:• Serial• Determines which decisions can be made• Segmented and hierarchical

Traditional strategy process

Approach:• Discovery-based• Recognize inherent uncertainty and

incorporate uncertainty resolution and management into process

• Iterative• Focus includes market, customer, channels,

products and technology• Future oriented

Goal of each phase:• Create learning opportunities• Uncertainty resolution that enables next

level of decision making

Characteristics:• Dynamic• Collaborative, multidisciplinary• Determines which decisions must be made

Technology-driven business strategy process


Versus


Because of its inherent parallelism and the focus on merging market insights with technological know-how, technology-driven business strategy can offer some distinct advantages. It:

• Speeds time-to-market and reduces risk of technology obsolescence

• Provides early warning of potential business disruption – and the means to inten-tionally disrupt competitors

• Mitigates the bureaucracy of strategic planning processes that too often thwart innovation, particularly at large companies

• Accommodates the increasing speed and complexity of business which can become unmanageable with a traditional annual planning cycle.

Where is your strategy development approach taking you?Although their specific strategies change from time to time, many companies step through the same basic, calendar-driven strategy process year after year, without a second thought. And, correspondingly, many are disappointed with the degree of innovativeness their strategies exhibit – and the revenue growth they actually produce. If yours is one of those companies, it may be time to rethink your strategy development process.

Ten signs you may need to challenge your current business strategy development processes1. Shareholder growth expectations exceed what is possible with the current product and market scope

of your business. 2. New product/service introductions are consistently late or sometimes technologically obsolete by the

time they reach the market.3. Products or services lack differentiation, which has led to declining margins and commoditization. 4. Emerging business opportunities that are abandoned by your company are readily exploited by new

market entrants.5. Competitors’ new business models are challenging the industry’s current revenue and profi t

mechanisms. 6. The market and technology environment constantly demands more fl exibility and responsiveness

from your business.7. The majority of technology-related spend is devoted to effi ciency programs and process areas that do

not directly contribute to market-based competitive advantage.8. These business-led productivity programs tend to produce transitory cost savings rather than long-

term structural cost reduction rooted in transformed operational capabilities.9. Technology implementation programs typically have whale-curve ROI profi les with “hard”

investments chasing after “soft” returns in out years.10. Technologies that could break current industry rules of scale or change the basis of competition are

often left unexploited until it is too late.


ConclusionAs business executives formulate strategy, they must consider some important points:

• Innovation is critical to sustained growth. Growth has once again assumed a prominent position within the strategic agenda for executives, and significant growth expectations have been embedded in many companies’ current valuations. Innovation-based growth allows companies to meet these expecta-tions. Managing through changing technology contexts allows companies to sustain that growth.

• Innovation happens at the intersection of market insight and technological know-how. Invention is not the same as innovation. Technological capabilities are of little value without the market insight that determines their application. And market insights left unexploited by technology create vulnerabilities that can be attacked by opportunistic competitors or new entrants.

• Companies must factor technology into business strategy development. Technology’s reach extends to virtually every product and industry. And the technology context in which businesses and industries operate is changing more rapidly than ever. Deferring technology to a final strategy implementation step or treating it as a constant that can be safely reassessed every few years precludes a host of potentially innovative business strategies that never surface for consid-eration. This sort of blind spot provides ample room for rivals to step in and out-innovate. To avoid gaps in business strategy, firms must consider technology – its shifts, possibilities and impacts – just as they do customers, channels, products and markets.

• Technology-driven business strategy helps companies channel innovation. Technology-driven business strategy can expand a company’s purview by putting perennial industry challenges (and the latest marketplace developments) in a fresh context that stimulates innovation. With this approach, the important inter-section between technological know-how and market insight is encouraged, not blocked. Technology is evaluated in concert with customers, channels, products and markets, serving as a catalyst to drive strategic innovation.

Although stumbling upon an innovative strategy might help a company meet growth expectations for the current year, adopting a business strategy development process that systematically spurs innovation can foster the type of sustainable growth necessary to maintain industry eminence.


To learn more about technology-driven business strategy, please contact us at [email protected]. To explore other resources for business executives, you can visit our Web site:

ibm.com/bcs

About the authorsKevin McCurry is a Partner within the Strategy and Change Practice of IBM Business Consulting Services. He can be contacted at [email protected].

Saul J. Berman is a Partner and Global Leader of the Business Strategy Practice of IBM Business Consulting Services. He can be contacted at [email protected].

Jeff Hagan is an Alliance Development Manager within IBM Business Consulting Services. He can be contacted at [email protected].

ContributorsThe authors would like to acknowledge the guidance and leadership of Eric Pelander, as well as the analytical contributions of Ragna Bell, Steven Foecking, Mark Overstreet and Sonny Saksena.

About IBM Business Consulting ServicesWith consultants and professional staff in more than 160 countries globally, IBM Business Consulting Services is the world’s largest consulting services organization. IBM Business Consulting Services provides clients with business process and industry expertise, a deep understanding of technology solutions that address specific industry issues and the ability to design, build and run those solutions in a way that delivers bottom-line business value.


References1 Mankiw, N. Gregory. “Principles of Economics.” Thomson South-Western

Publishing. 2003. 2 “Your Turn: The Global CEO Study 2004.” IBM Business Consulting Services. 2004.3 Carey, John. “Flying High?” BusinessWeek. October 11, 2004.4 U.S. Patent and Trademark Office. “All Patents, All Types.” http://www.uspto.gov/

web/offices/ac/ido/oeip/taf/apat.htm#PartB5 IBM Institute for Business Value analysis of public company information.6 Baum, Herb and Leigh Buchanan. “Herb Baum on Innovation: Leapfrogging

R & D.” Harvard Business Review. October 1, 2004.7 Christensen, Clayton M. The Innovator’s Dilemma. Boston: Harvard Business

School Press. 1997. 8 Christensen, Clayton M. and Michael E. Raynor. The Innovator’s Solution. Boston:

Harvard Business School Publishing. 2003.9 McLindon, Andrew. “Merloni builds smarter appliances.” electricnews.net. April

8, 2003.10 Bremner, Brian. “Internet Age Japan: PCs, Smart Phones, and...Vending

Machines?” BusinessWeek online. November 1999. http://www.businessweek.com/bwdaily/dnflash/nov1999/nf91123b.htm

11 Powell, Alvin. “Smart machines save energy: Vending machine innovations slake thirst for savings.” Harvard University Gazette. October 17, 2002.

12 Wrolstad, Jay. “IBM Sends Smart Laundry Machines to College.” Wireless NewsFactor. September 4, 2002.

13 Christensen, Clayton M. The Innovator’s Dilemma. Boston: Harvard Business School Press. 1997. See this work for additional analysis on changing the business competition in an industry.

14 Progressive Corporation. “The Progressive Corporation 2003 Annual Report.” 2003. http://www.progressive.com/investors/03_annual/03_annual/flash/index.html

15 Progressive Corporation. “Progressive Backgrounder.” http://www.progressive.com/newsroom/printme.asp?article=http://www.progressive.com/newsroom/backgrounder.asp


16 Ibid.17 Progressive Corporation. “Progressive Awarded Second Patent for Usage-Based

Auto Insurance Rating System.” July 13, 2000. http://www.progressive.com/newsroom/2nd_patent.asp

18 Progressive Corporation. “The Progressive Corporation 2003 Annual Report.” 2003. http://www.progressive.com/investors/03_annual/03_annual/flash/index.html

19 IBM Institute for Business Value analysis of public company information.20 IBM Corporation. “Boston Coach drives to new heights of efficiency with a realtime

dispatch system.” August 2004. http://www-1.ibm.com/industries/wireless/doc/content/casestudy/1151769104.html

21 IBM Corporation. “Norwich Union’s pay as you drive insurance initiative.” 2004. http://www-1.ibm.com/industries/wireless/doc/content/casestudy/1153089104.html

22 Marshak, David S. “Charles Schwab Responds to Market Conditions and Customer Needs.” Patricia Seybold Group. December, 2003. http://www-306.ibm.com/software/ebusiness/jstart/news/schwab.pdf

23 Siemens Medical. “Workflow improvements at every point of care.” 2004. http://www.medical.siemens.com/webapp/wcs/stores/servlet/PSGenericDisplay? storeId=10001&langId=-1&catalogId=-1&pageId=10793

24 Iansiti, Marco. Technology Integration. Boston: Harvard Business School Press. 1998. See this work for extensive analysis on the related topic of the impact of experimentation and market feedback in product development initiatives.

© Copyright IBM Corporation 2005

IBM Global ServicesRoute 100Somers, NY 10589U.S.A.

Produced in the United States of America03-05All Rights Reserved

IBM and the IBM logo are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both.

Other company, products and service namesmay be trademarks or service marks of others.

References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates.

G510-4018-00

IBV - Eliminating the strategic blind...

Documents

Transcript of IBV - Eliminating the strategic blind...